Wells Fargo Report Updated October 15, 2016

Wells Fargo is updated and rated Speculative Buy at U.S. $44.71.

This bank has been very much in the news due to the fact that an audit has found that its branch staff opened some 2 million deposit and credit card accounts without customer authorization. The company has agreed to a fine of $185 million. The size of the fine is not a problem as the company earns about $22 billion per year.

Regulators including the U.S. house of representative and the Senate have expressed extreme outrage. The CEO (who guided the company successfully through the financial crisis and increased its earnings per share greatly) has resigned and has foregone $41 million in unvested options. Another top executive has foregone some $11 million and retired with no severance. But nothing short of jail time (for alleged crimes) would satisfy the harsher critics. The banks sales culture has been demonized although there is nothing illegal or immoral about selling financial services. (There is about opening unauthorized accounts of course.) The executives clearly made mistakes here. And their reaction to the scandal has been too slow. But some of the harsher critics are probably “over the top” in their slanderous statements.

The actual earnings of Wells Fargo are so far almost entirely unaffected and it earned $5.6 billion in Q3. The stock price is down roughly 10% on the news and is down 18% year to date. On the numbers, the stock looks cheap. But the ultimate damage and fines due to this scandal cannot be known.

Investors with a larger risk appetite may wish to buy on the dip. Others may view the risk as far too high and refrain from buying or even sell any shares they hold.

I have about 9% of my portfolio in this stock and have made good gains over the past few years. I am holding that position and have no intention of reducing it. I believe Wells Fargo will recover but this could easily take one to two years and the shares could certainly go lower before they recover.